This article may be relatively long but it provides a systematic evaluation of the empirical literature based on the main topics associated with the cryptocurrency market since its inception as a financial asset in 2009.
According to various sources, a digital currency is defined as a digital or virtual currency that is designed to function as a method of exchange. It also applies encryption to ensure the security and verification of transactions, and to control the ability to create new units of a particular digital currency.
Despite the exaggerated price increase in recent years, digital currencies have been subjected to allegations of price increases, but digital currency trading has remained one of the preferred trades for many traders around the world.
The main focus of this idea was the triple problem that exists between the regulators;
The possibility of prohibited use by hiding the identity of the user within the modern and underdeveloped exchange system; And infrastructure breaches affected by the increase in cybercrime. Each of these influences the assessment of the role of cryptocurrencies as a reliable investment asset class.
The current analysis relied heavily on secondary sources found on the Internet. The latter includes official statements, articles, reports, studies and academic research papers. Because the topic is broad in scope with great thanks, there is not a single topic to be dealt with in any depth, nor is there a direct reference in the text to support specific phrases. However, the online sources on which we base this article are in no way responsible for any errors or omissions, and Arinsen is fully responsible for them. After a short introduction, this article will be divided into 16 subsections.
What are digital currencies and how are they traded?
Like any currency, digital currencies can be used to buy and sell goods and services. However, unlike traditional currencies, digital currencies are cryptocurrencies and use this encryption to increase security during online transactions. Although these digital currencies can be used to buy materials, the greatest interest in these currencies that have not yet been regulated is trading them for profit, with speculators in the market controlling the rise in their prices sometimes, as we will discuss later.
What is digital currency?
The digital currency is secured by encryption so it’s virtually impossible for double fraud or spending. The final problem, which is not present with traditional currencies, involves the risk of double spending on a single digital currency. Certainly, it is a different potential hurdle for digital currencies, in relative terms digital information can be copied easily from individuals (albeit unknown) who understand the blockchain network and the computer software needed to control it.
Many cryptocurrencies are decentralized networks that rely on “blockchain” technology – a distributed ledger enforced from a disparate network of computers. In general, digital currencies agree that they are not issued by any central authority, so they are theoretically resistant to government interference or manipulation attempts.
What is blockchain technology and how does it relate to digital currencies?
In order to fully understand digital currencies, we must first explore the core of any technological physical transaction: Blockchain. It is a type of distributed ledger technology (DLT), which is a term that encompasses all types of technology used to facilitate the exchange of value between users on a specific platform. It is originally a decentralized database system to collect digital information stored in the form of a “block”. In the blockchain, users create blocks of data containing information, which are then recorded as peer-to-peer (P2P) over a network using a trust device and encrypted advertisement. This block of data is then linked to other users’ data templates, creating a “chain”. Each block in the chain is given a unique identifier called “hash”, which works like a fingerprint because it is used to distinguish data stored in that particular block from other blocks in the chain.
Blockchain technology is known for its over-tight security, short transaction time, natural cost-effective, and decentralized networks. To emphasize this, in this article, we’ll focus on one of the most discussed forms of blockchain: digital currencies.
The history of digital currencies
During the technology boom in the mid to late 1990s, there were several attempts to create a digital currency, and systems such as Flows, Beans and DigiCash appeared on the market, but they ultimately failed. There are many different reasons for its failures, including fraud and financial problems, for example. It is known that all of these systems use the trusted third-party approach, which indicates that the companies behind them achieve and facilitate transactions. Because of these companies’ failures, creating a digital cash system was seen as a “lost cause” for a long time.
In 2009 when an anonymous group of programmers under the pseudonym “Satoshi Nakamoto” introduced Bitcoin. It has been described as a “peer-to-peer electronic cash system,” as it is a decentralized system, which means that there are no servers involved, and no central supervisory authority. Somewhat the same concept as P2P for sharing music files, or otherwise.
Of course, as mentioned above, one of the most important problems that any electronic payment network has to address is the problem of double spending. Simply, this is a fraudulent technique for spending the same amount twice. The traditional solution to countering this phenomenon has been a trusted third party – a central server – that keeps records of balances and transactions. However, this method always requires an authority to fundamentally control your finances and all personal details.
In all decentralized network transactions such as Bitcoin, every participant needs to do this routine work. This is done via Blockchain – the general ledger of all transactions made at any time within the network, and is available to everyone.
Each single transaction is a file consisting of global sender and recipient codes (wallet addresses) and the amount of currency transferred. The transaction also needs to be signed by the sender using his code. All of this is just basic encryption. Finally, the transaction is propagated to the network, but it must be confirmed first.
“miners” can settle transactions by resolving a cryptographic puzzle, first by taking transactions. Second, by marking it as legitimate; And third, by publishing it across the network. Then, each node of the network is added to its database. Once a transaction is confirmed, it is irrevocable and irreversible, and miners receive a bonus, in addition to the transaction fee.
Basically, any cryptocurrency network is based on the absolute consensus of all participants regarding the legitimacy of credits and transactions. If the network nodes are in conflict with one account balance, the system will basically collapse. However, there are many rules programmed into the network to prevent this from happening.
Understanding digital currencies
According to the huge literature on the subject, cryptocurrencies are systems that allow secure online payments that are categorized in terms of default “tokens”, which are represented by the system’s internal ledger entries. At the same time, the term “tokens” refers to the various encryption algorithms and encryption techniques that protect these entries, such as elliptical curve cipher, public and private symbol pairs, and hashing functions.